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The econometrics of rational addiction

Citation

Baltagi, Badi H. & Griffin, James M. (2001). The econometrics of rational addiction. Journal of Business and Economic Statistics, 19(4), 449-454.

Abstract

This article reexamines the econometric estimation of rational-addiction models considered by Becker, Grossman, and Murphy (BGM) for cigarette consumption. The rational-addiction model poses a number of additional econometric difficulties including endogeneity due to the presence of leads and lags of the dependent variable and serial correlation in the disturbances. BGM considered a fixed-effects two-stage least squares (2SLS) estimator. It is well known that this estimator is biased for fixed T. This article suggests a forward-filter first-difference 2SLS estimator and a generalized method of moments type of estimator that are consistent. Using a panel dataset of 46 states over the period 1963–1992, this article estimates the rational-addiction model for cigarettes. Our empirical results are both supportive of the rational-addiction hypothesis and more plausible than BGM's original results.

URL

http://dx.doi.org/10.1198/07350010152596691

Reference Type

Journal Article

Year Published

2001

Journal Title

Journal of Business and Economic Statistics

Author(s)

Baltagi, Badi H.
Griffin, James M.